Bankruptcy (Scotland) Bill [H.L.]

HL Deb 04 December 1984 vol 457 cc1219-60

3.1 p.m.

The Lord Advocate (Lord Cameron of Lochbroom)

My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.—(Lord Cameron of Lochbroom.)

On Question, Motion agreed to.

House in Committee accordingly.

[THE LORD ABERDARE in the Chair.]

Clause 1 [Accountant in Bankruptcy.]:

Lord McCluskey moved Amendment No. 1: Page 1, line 9, leave out ("trustees") and insert ("administrators").

The noble and learned Lord said: As noble Lords who have studied the Marshalled List of Amendments will see, the first amendment is related to the next six amendments and so Amendments Nos. 1 to 7 are really all to the same effect. Amendment No. 2: Page 1, line 14, leave out ("trustees") and insert ("administrators"). Amendment No. 3: Page 2, line 21, leave out first ("trustee") and insert ("administrator"). Amendment No. 4: Page 2, line 24, leave out the first ("trustee") and insert ("administrator"). Amendment No. 5: Page 2, line 29, leave out first ("trustee") and insert ("administrator"). Amendment No. 6: Page 2, line 37, leave out ("trustee") and insert ("administrator"). Amendment No. 7: Clause 2, Page 3, line 7, leave out ("trustee") and insert ("administrator").

Under Clause 1 and Clause 2 and, indeed, for that matter in various other clauses, there is a person to be appointed in each and every sequestration called the interim trustee. His general functions are those set forth in Clause 2 of the Bill. There are various other provisions relating to his activities, and his powers and so on, in other parts of the Bill. The only point that I seek to make by Amendment No. 1 and carry through by Amendments No. 2 to 7 inclusive is that the title of this person should not be "interim trustee", but "interim administrator".

The principal reason why I recommend that change to the Committee is that the Law Society of Scotland Bankruptcy and Liquidation Committee which considered this matter suggested that it would be a more appropriate title. I respectfully agree with that suggestion. I think first of all. that if one considers the position and the functions of this person, one sees that he is not a trustee (as one understands the Bill) in the sense that initially, at the time of his appointment, the estate of the bankrupt is vested in him, and it does not necessarily follow that at any stage the estate will be vested in him or indeed in a permanent trustee because other clauses of the Bill—and I would draw the attention to the Committee to Clause 13 and, for that matter, to Clause 12—make it plain that there may be arising circumstances in which there will be no award of sequestration; and of course there may be no appointment of a permanent trustee and the sequestration may not proceed to a divesting of the bankrupt and separation between him and his estate.

For these reasons it would appear appropriate that this official should be called an administrator rather than a trustee. I think it would also tend to avoid confusion between a person whose functions are essentially administrative in the initial stages and the trustee when he is appointed, and it would also draw a distinction between this official and a trustee under a trust deed, such as is referred to in various clauses, notably Clause 13(1). He is essentially engaged only in an interim administration and I would suggest that that would be an appropriate title to give him. For these reasons, therefore, I would support the proposal made by the Law Society of Scotland Bankruptcy and Liquidation Committee and ask your Lordships' Committee to approve this change. I therefore beg to move Amendment No. 1.

Lord Cameron of Lochbroom

As the noble and learned Lord, Lord McCluskey, has stated, these are amendments to a title of an official, the interim trustee, who appears in certain provisions of the Bill. I would suggest to your Lordships that the expression "interim trustee" is the more appropriate expression in the circumstances. It describes the person who is appointed by the court on the debtor's estate to exercise the general functions described in Clause 2(1), pending the appointment of a permanent trustee. I would add that it is a title selected by the Scottish Law Commission when the Bill was initially drafted by it.

Although the debtor's assets and liabilities are not vested in the interim trustee, he is nevertheless empowered to safeguard the debtor's estate in the interests of all the creditors. To use the expression "interim administrator" to describe him would fail to convey his true role as a trustee on the debtor's estate, exercising certain protective functions over it pending the appointment of a permanent trustee.

I should add, too, that the term "interim administrator" would also tend to be confusing with the proposal in the White Paper on a revised framework for insolvency law to have a new office of administrator of a company. I think the noble and learned Lord made reference to the Law Society proposals which involve the use of an official called an interim administrator, but that was in a context different from that which is presently proposed for the interim trustee in this Bill. I would, therefore, invite the noble and learned Lord perhaps to withdraw the amendment.

Lord McCluskey

The Committee will be grateful to the noble and learned Lord for his explanation. I certainly do not feel passionately about this matter. I should like to think that the Government have given it due consideration, and having listened to the reply, I am satisfied that that has been done and that there are reasons, respectable reasons, which can be considered. If the Law Society of Scotland wants to press others to have this change made, then it can do so after consideration of the reply which I have just heard. In the meantime, for my purposes, I do not want to press this amendment, nor Amendments Nos. 2 to 6 inclusive. Therefore, I beg leave to withdraw Amendment No. 1.

Amendment, by leave, withdrawn.

[Amendments Nos. 2 to 6 not moved.]

Clause 1 agreed to.

Clause 2 [Interim trustee]:

[Amendment No. 7 not moved.]

Clause 2 agreed to.

Clause 3 [Permanent trustee]:

On Question, Whether Clause 3 shall stand part of the Bill?

Lord McCluskey

Clause 3 deals with the permanent trustee. In relation to subsection (2), the same body to which I referred earlier, the Bankruptcy Committee of the Law Society of Scotland drew attention to the fact that the subsection states: A permanent trustee in performing his functions under this Act shall have regard to advice offered to him by the commissioners (if any)". I presume that the term "if any" refers to the commissioners, rather than to the advice. The committee of the Law Society of Scotland seemed to think that the wording of that subsection was such that the permanent trustee was, in effect, bound to carry out the advice that he was given. I do not support that reading of the subsection. I hope that the noble and learned Lord will be able to assure your Lordships' Committee, and through the Committee the Law Society of Scotland, that I am reading this correctly and that the duty to have regard to advice is simply a duty to do that. He must consider the advice, but he is free to take his own decision in the light of his own judgment, and that is not interfered with by this wording. For those reasons I am perfectly happy with the wording of subsection (2).

The other subsection to which I draw attention is subsection (4), which narrates that, A report under subsection (3)"— that is, a report to the Accountant in Bankruptcy— shall be absolutely privileged". This was not a subsection contained in the Bill prepared by the Scottish Law Commission, but I think the Law Society of Scotland suggested that there should be such privilege and I am happy to acknowledge that the Government have given effect to it.

As regards the rest of the clause, I am perfectly content with the wording of it and certainly have no Motion to make to your Lordships in respect of it.

Lord Cameron of Lochbroom

I am happy to assure the noble and learned Lord that as regards subsection (2) the intention is that a permanent trustee shall simply have regard to advice in the sense that he will consider it and will not be bound by it. As regards subsection (4), in a sense that is included in order to make quite clear that the report made under subsection (3) shall be absolutely privileged if that is not already the case. I am grateful to the noble and learned Lord for drawing attention to this matter.

Clause 3 agreed to.

Clauses 4 and 5 agreed to.

Clause 6 [Sequestration of other estates]:

On Question, Whether Clause 6 shall stand part of the Bill?

Lord McCluskey

I ask the noble and learned Lord one question which puzzles me when I compare this Bill with the Bill that your Lordships will, in Committee, consider next. Subsection (2) reads: It shall not be competent to sequestrate the estate of any of the following entities". I am not very happy about the word "entities", but I shall no doubt have to live with it. The first entity is: a company registered under the Companies Act 1985", and in the margin we see a reference to, "1985 c. 00". I think I understand perfectly well what that means because we have already had the Companies Bill read a first time in this House and perhaps, indeed, for a second time; but, normally, when in a Bill reference is made to another Bill which is before this House, it is not referred to in these terms—and we see exactly that in the Family Law (Scotland) Bill which follows. I much prefer what is contained in this Bill, but I wonder what warrant there is for adopting the practice that we see set forth in subsection (2).

I have finished, but there are two reasons why I am not sitting down. One is because I was assured at the lunch table that unless I spoke at some length the House might have to rise before dinner, which would be to the disadvantage of visitors. The second reason is that I see the noble and learned Lord the Lord Advocate is still awaiting a reply to my question; but as he now has it I can cease.

Lord Cameron of Lochbroom

I am now happily in a position to answer the noble and learned Lord on this matter. Advice was taken from the Public Bill Office and I understand that in these circumstances the form of words which appears in subsection (2) is one which has received imprimatur, and accordingly is printed for your Lordships.

Clause 6 agreed to.

Clauses 7 to 11 agreed to.

Clause 12 [When sequestration is awarded]:

3.15 p.m.

Lord McCluskey moved Amendment No. 8: Page 12. line 44, at end insert—("; or

• (c) the debtor satisfies the court of facts and circumstances which show that—
1. (i) the petitioner or other creditor would not be materially prejudiced by a refusal to award sequestration forthwith; and
2. (ii) that it would be to the material prejudice of the debtor to award sequestration forthwith; and
3. (iii) there are reasonable grounds for inferring that if the award of sequestration were to be delayed for a period (not exceeding 28 days) the debtor would be able to pay all debts due by him to the petitioner and any known creditors, whether concurring in the petition or not.").

The noble and learned Lord said: We are dealing here with an award of sequestration and the appointment of an interim trustee. The clause provides for two situations. One is that in which the petition for sequestration of the estate is presented by the debtor. That is common enough, and perfectly sensible. In those circumstances subsection (1) of this clause provides that, the court shall award sequestration forthwith if the court is satisfied that the petition has been presented in accordance with the provisions of this Act".

In effect, therefore, the court has no discretion when the debtor applies and there is no particular reason why it should have, provided the formalities have been complied with.

However, when we come to the second situation covered by the clause, the petition for sequestration of a debtor's estate may be, presented by a creditor or a trustee acting under a trust deed".

In those circumstances subsection (3) provides that the court, shall award sequestration forthwith unless—

1. (a) cause is shown why sequestration cannot competently be awarded; or
2. (b) the debtor forthwith pays or satisfies or produces written evidence of the payment"

of the debt, or all his debts, for that matter. That simply means that in the case of a creditor's petition for the sequestration of a man who is apparently insolvent, the court has no discretion at all to refuse the sequestration. It may do so only on the ground of some lack of formality, or, indeed, on payment forthwith.

In my submission, that is much too severe and much too harsh. In Amendment No. 8 I propose that the court shall have power to refuse the sequestration forthwith if the debtor can satisfy the court of certain facts and circumstances, and they are set out in the amendment. They are, first, if he can demonstrate that the creditors are not going to be prejudiced by the refusal; secondly, if he can demonstrate that he himself is going to be prejudiced by a grant; and, thirdly, if he can demonstrate that there are reasonable grounds for inferring that provided the award were to be delayed for a period, which I say need not exceed 28 days, the debtor would be able to pay all debts due by him to the petitioner and the other creditors within that time.

A debtor may find himself apparently insolvent within the meaning of the Bill under Clause 7. However, he may have perfectly good reasons for supposing that he will not long remain apparently insolvent. His ship may come in, to use a familiar expression. He may have excellent prospects of being able to borrow money from somebody who is willing to lend it to him on a long-term basis secured only by a personal guarantee. He may have other reasons for supposing that his assets will be augmented either by finding something that is lost or by somebody repaying him a debt—even a debt of honour which has not been paid or which has been wrongfully or unavoidably delayed. He may have some sort of claim which has no necessary value but a potential value which may be settled shortly; or he may be awaiting the result of a court action which could result in a payment to him.

Therefore, there are circumstances which can exist, although only rarely, in which, provided the creditors are not prejudiced but the debtor would be prejudiced, and provided there is a reasonable expectation that the situation of apparent insolvency could be resolved in a short time, the court should be free to withhold the award of sequestration.

At the same time, I want to refer to the provision in Clause 51 which we shall be discussing a little later on. The effect of it is that if a person is sequestrated the sequestration stands for a period of three years. People could find themselves—particularly in the present unfortunate economic climate—apparently insolvent suddenly and through no particular fault of their own. It would be a great pity if they then had to remain sequestrated for a period of three years, particularly if, at the moment the sequestration was being sought, they could point to an instant way in which the sequestration could be rendered unnecessary.

There is no particular magic to the period of 28 days in my amendment. It might be possible to lengthen that period, but I should like the Committee, and certainly the Government, to consider the possibility of conferring on the court some element of discretion. By all means put the burden of proof upon the debtor to avoid the normal consequences of his being apparently insolvent, but I do not think that the court should be deprived of all discretion in the matter. I respectfully suggest to the Committee that this is a measure which might well avoid the shame, embarrassment, expense and inconvenience of sequestration in at least some cases where the debtor's insolvency is not due to any fault on his own part and where it is an insolvency which can be fairly swiftly resolved. For those reasons, I beg to move Amendment No. 8.

Lord Wilson of Langside

Listening as I invariably do with immense interest to what the noble and learned Lord, Lord McCluskey, had to say on this amendment, I recalled out of the past that it was my lot—I cannot recall whether it was a happy lot or an unhappy lot—some 20 or 30 years ago to preside over the hearings of these applications for sequestration. So far as I recall from my experience, I think there is a great deal of wisdom in this amendment to give the court considering the application a wider discretion than it would otherwise have, and it might very well prevent the kind of mischief that Lord McCluskey referred to. Accordingly, I would simply say that I share his anxiety that the Committee and the Government should give sympathetic consideration to this amendment.

Lord Cameron of Lochbroom

I of course take note of what both the noble and learned Lords opposite have said about making an exception in this case in the award of sequestration, but there are sound reasons for such an exception not to be made. I would draw the noble Lords' attention to the arguments which were adduced by the Scottish Law Commission in paragraphs 5.21 and 7.16 of their report on this very matter. It is pertinent to observe that they gave very detailed consideration to this very question, and indeed to the arguments which are directed precisely there against what has been sought to be introduced by this amendment.

It has long been regarded as a sound principle that any decision of the court to award sequestration must be based upon the fulfilment of certain established and objective criteria, and issues of fact which require investigation should not be admitted. In my submission, to depart from this principle would introduce uncertainty and delay at the very time when certainty and speed are essential in order to protect the assets for the creditors generally. I think I can do no better than to quote Lord President Normand, as he then was, who said that: To allow a debtor, before the granting of sequestration, a parole proof that he has resources available to meet debts which he refuses to pay would have the most harmful results. There would be many petitions which could not be disposed of without proof. The debtor would remain vested in his estate pending proof and would have full opportunity of making away with his assets". The danger of the debtor dissipating his assets is a powerful objection to delay in making an award of sequestration, since any delay is also likely to increase the difficulty of recovering assets fraudently given away by the debtor before sequestration. It is difficult therefore to envisage circumstances where a court could hold that the creditors would not be materially prejudiced by delay in making the award. Furthermore, creditors—who may incur irrecoverable expense in petitioning for sequestration—should know exactly what requirements they must fulfil in order to succeed in their petitions. Of course, as your Lordships will be well aware from a perusal of Clause 7 of this Bill, which gives meaning to the phrase "apparent insolvency", certain passages of time have to pass before the apparent insolvency is created.

The debtor can, of course, escape sequestration as this clause provides, by paying the debt on which his apparent involvency was founded and, if different, the debts due to the parties to the petition; no more is required. On the other hand, if sequestration is awarded and the debtor's estate can in fact pay his debts in full, he himself can petition for recall on that ground. Perhaps I should just draw the attention of the noble and learned Lord, Lord McCluskey, to the provisions in clauses which have yet to be considered by your Lordships' Committee; namely, Clauses 16 and 17 and, in particular, Clause 17(l)(a), which of course provides that a debtor can petition for recall of the sequestration at any time in the event that the estate has met all the outstanding debts.

While not insensible to the arguments that have been put forward, I would suggest to your Lordships that the principle upon which the Scottish Law Commission proceeded is a correct one, and that this amendment should not be accepted.

Lord Wilson of Langside

I appreciate, of course, for my part, the force of the answer which the Lord Advocate has given and the arguments that persuaded the Scottish Law Commission. The only point I would make in reply is that of course one should have confidence that those administering these matters and considering these petitions for sequestration are fully alert to the dangers which may follow if they are too readily persuaded of the exceptional circumstances envisaged in the amendment.

Lord McCluskey

I must confess I do not find the reply a very satisfactory one. In the first place, may I deal with the other provisions of the Bill to which the noble and learned Lord referred. He referred to Clauses 16 and 17. and these clauses permit the debtor, among others, to petition for the recall of an award of sequestration. Obviously, if the debtor's ship did come in, if he did find himself otherwise able to repay his debts and to be solvent again, then he could present this petition. He could present it the next day, after the award of sequestration. Unfortunately, because of the way the Bill is cast, he has got to present a petition to the Court of Session. He may have been sequestrated at the sheriff court; he has got to come to the Court of Session with a petition, which is expensive, and it might also cause delay and considerable inconvenience. So, in any event, by providing for an instant petition for recall as Clauses 16 and 17 do, the Government effectively concede the argument that there may be circumstances arising on the spot which would enable the debtor to persuade the court to have the sequestration recalled. Of course, in those circumstances, the court is given a discretion.

What worries me about the matter we are dealing with in the clause to which that amendment relates—Clause 12—is that the court is not exercising the normal function of deciding any matter at all. It decides purely administrative matters of competency, that the person has been cited in the right way and that kind of thing, and then it rubber-stamps the decision to sequestrate.

The Scottish Law Commission, in the paragraphs referred to, dealt with a matter closely allied to this, but not precisely the same one. What it was concerned about was the debtor's offer to prove that he is solvent. I am not concerned with precisely that situation, although it would be covered no doubt by my amendment. I am concerned with the situation where at the instant of the presentation of the petition the debtor is not in fact solvent. He is apparently insolvent within the meaning of the Act. There may be many circumstances in which that can happen. They can be of a temporary character and they can be of a character that demonstrates that the debtor is totally without fault.

3.30 p.m.

Let me give one example that I want to mention in a different context later. Suppose that the debtor is a businessman who is manufacturing chocolate bars, and somebody announces to the world that the chocolate bars manufactured by this particular person have in various shops been injected with rat poison. There would be a sudden falling off in his sales. It may be in the case of a small businessman that that would endure for some time, and during that period of time his business might collapse. But it may be that he is otherwise sound. He has other people who believe in him, and given a little time he can recover. I think that the court should be allowed to look sympathetically at that kind of circumstance.

The other one that will come to your Lordships' mind is of course if someone is a small businessman but has an overseas market. He may have incurred certain debts, which he has to meet on a regular basis, to be met in dollars. If through no fault of his but through economic circumstances over which he has no control the sterling-dollar exchange rate changes dramatically, he can suddenly find himself facing a debt which is substantial and which is not caused by any fault of mismanagement.

All I am suggesting is that he should be able to advance that kind of background to illustrate why he is insolvent, and not, as paragraph 5.21 of the Scottish Law Commission's report is concerned with, to suggest that he is not. He should be able to say, "Yes, I am insolvent but it is through no fault of mine. I shall be materially prejudiced by being put out of business for three years. The creditors will not be prejudiced because I believe that I can put the matter right, given a sufficient period of time". It may be 28 days or it could be three months. But he should be able to ask the court to exercise its discretion in the light of the circumstances.

The last point that I want to deal with is the one raised in reply to me by the noble and learned Lord the Lord Advocate. He said that the proposal might cause delay. Of course in sequestrations one does not want delay. One of the reasons is that during any period of delay there may be a wasting away of the debtor's assets. But that again is matter that can be dealt with by the Bill, and it certainly can be dealt with by the courts. The courts are accustomed to granting what in England are called injunctions and in Scotland interdicts—in any event, orders of one kind or another which prevent the dissipation of the estate during an interim period.

Lastly, the Bill itself in another context, to which we shall come, recognises that when disputed questions of fact fall to be resolved in the initial stages of a sequestration, then it could be done by summary proceedings; and summary proceedings in the sheriff court can literally take place within the hour, as I am sure the noble and learned Lord, Lord Wilson of Langside, can confirm. If the statute provides that the sitting shall be summary and it shall be dealt with at once, it can be given priority and be dealt with at once.

I do not at all find the Lord Advocate's reasons convincing. I wonder whether he is prepared on this particular matter—because it raises a slightly different point from the one on which Lord Normand spoke and the Scottish Law Commission wrote—to entertain the debate a little more closely when he reads it in print and see whether he might make the change.

The last thing that I want to say before I ask the Lord Advocate to respond to that is that I am delighted to hear him say that the best reasons for putting this in the Bill are the reasons advanced by the Scottish Law Commission. I hope that later on when I come to argue the Scottish Law Commission's case against the Government's change he will accord its reasoning the same respect and admiration that he has just accorded it in this debate.

Lord Cameron of Lochbroom

I think sometimes special pleading and hard cases lead to bad law. What the noble and learned Lord opposite perhaps has forgotten is that of course there are other ways in which a person in the position in which he suggests persons may find themselves can deal with a matter of this kind by discussion with creditors. Of course, as I said on the occasion of the Second Reading, the questions of voluntary agreements are always open to a debtor in these matters.

My submission to your Lordships is that it is really not appropriate in the matter of an award of sequestration—which is really resorted to, after all, by creditors only when they have reached the point when they really cannot reasonably foresee that their money will be fully repaid—that there should be any derogation from the general principle which the Scottish Law Commission accepted should rule in this matter.

In this respect the Government fully accept and are in accord with the Scottish Law Commission's recommendations so far as this clause is concerned. I cannot give any undertaking that we shall look at this matter again. It is one of principle upon which the Government are quite clear.

Lord McCluskey

The sun has gone down early on the Lord Advocate's spirit today. I hope that the rest of the debate will not be as bleak as the answers that he has just accorded to me in respect of Amendment No. 8. However, having secured no promise from him to look at it again, I know that he will undoubtedly look at it again because he will read what appears in Hansard. I invite him to do so. I hope that having squeezed nothing at all out of him on this occasion, I may apply pressure more profitably on another amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 12 agreed to.

Clause 13 [Appointment and resignation of interim trustee]:

On Question, Whether Clause 13 shall stand part of the Bill?

Lord McCluskey

This is the clause dealing with the appointment and resignation of the interim trustee. I need not trouble your Lordships with the general scheme of this, but under subsection (5) it will be seen that: No person appointed as interim trustee under this section shall be entitled to decline to accept his appointment". Your Lordships will have observed from other parts of the Bill that the court will appoint an interim trustee from the list of interim trustees; and of course one goes on to the list of interim trustees voluntarily.

But it seems slightly odd that under no circumstances can the interim trustee be entitled to decline to accept his appointment. It appears to me that a person may have an excellent reason for going on to the list and be perfectly willing to act in all cases, but there may suddenly be some terrible circumstance affecting him personally in his health or in his business, or merely pressure of business; but he is not entitled to refuse. I wonder whether the Government have given any consideration to that matter.

They may have received—I certainly did—from the committee of the Law Society of Scotland a representation about this matter. It appears to me to make some good sense to give the interim trustee the possibility of declining if he can demonstrate circumstances which on this particular day or at this particular time render it desirable that he should decline to accept the appointment.

This is not a big point and it is certainly not an amendment, but I wonder whether the noble and learned Lord can give me an indication as to why the provision is so strict and whether there is a possibility of making a change. If there were, I might consider it worth while inviting your Lordships at a later stage to consider an amendment in relation to subsection (5).

Lord Cameron of Lochbroom

The purpose of subsection (5) is to provide that there should be no delay in any appointment and to prevent trustees on the list of interim trustees from picking and choosing the sequestrations in which they wish to act. There is of course provision that under Clause 13(2) the interim trustee may resign office. That would seem to deal with the particular difficulty which the noble and learned Lord opposite raised. I should say that it is envisaged that in practice guidance is likely to be issued to sheriff clerks suggesting that prior to the award of a sequestration, they should take informal soundings of a particular trustee as to the availability to act. I think the noble and learned Lord opposite suggested illness but one can envisage, for instance, a person being away on holiday. It seems to me that a practice of that kind would really deal with the situation which he envisages.

That, together with the provision under subsection (2), enabling him to resign office and for the appointment of another interim trustee in his place, should get over the difficulties which the noble and learned Lord has pointed out. I am grateful to him, however, for raising the point in order that there might be clarification of the matter.

Clause 13 agreed to.

Clause 14 agreed to.

Clause 15 [Further provisions relating to award of sequestration]:

Lord McCluskey moved Amendment No. 9: Page 15, line 32, leave out ("shall") and insert ("may, and shall, if the court on awarding the sequestration so orders,").

The noble and learned Lord said: Clause 15 contains further provisions relating to the award of sequestration. The point which I raise in the amendment here is quite a small one. The Members of the Committee who have a copy of the Bill will see that under subsection (6) it provides that: The interim trustee, as soon as an award of sequestration has been granted, shall publish a notice in the prescribed form in the Edinburgh Gazette and the London Gazette stating that sequestration has been awarded and inviting the submission of claims to him.

I understand these are quite costly advertisements, albeit the Edinburgh Gazetteand the London Gazette are not newspapers that are read on the tops of buses and in tube trains. Nonetheless, they are able to charge substantial sums. They enjoy a monopoly of this type of reading material. They are quite expensive. No doubt the noble and learned Lord will be able to give us some information about what the cost is.

So what I am suggesting is that, instead of saying that the interim trustee "shall publish a notice", the matter might be dealt with by saying that he "may publish a notice" and if the court on awarding sequestration orders him to do so, he "shall" then publish. That again would give the court a discretion which would enable this expense to be avoided if the circumstances were such that it was entirely unnecessary. Of course the onus would be upon the interim trustee to satisfy the court that there would be nothing to be gained by presenting the advertisement in both these Gazettes.

The second point is that at the moment what is required is that the notice shall go into the Edinburgh Gazette and the London Gazette. There must be at least some sequestrations of small businessmen in Scotland which do not need to be advertised in the London Gazette. I think my amendment would permit the interim trustee to ask that the public notice in the prescribed form be put in the Edinburgh Gazette but not in the London Gazette.

I wonder whether the noble and learned Lord the Lord Advocate can tell us whether or not the Official Receiver in Bankruptcy in England is obliged by law to advertise in the Edinburgh Gazette? Or is it simply that the Scots are obliged to put their advertisements in both newspapers and the English are not? While the answer to that question is being found, I simply suggest to the Committee that what I am endeavouring to do in this, as in a number of amendments, is to give the court a little more discretion in order, in some cases, to temper swift justice with mercy and in other cases to avoid unnecessary expense.

If the court is not satisfied that adequate notice will be given by a notice published in the Edinburgh Gazette only, it would be free, with my amendment, to order it to be published elsewhere. So I trust that the noble and learned Lord will be able to give an unusually warm welcome to this amendment. I beg to move.

3.45 p.m.

Lord Cameron of Lochbroom

So far as the Official Receiver is concerned, this is not a matter to which I can give a ready answer but if the noble and learned Lord opposite wishes a response on that matter, I should be quite happy to write to him.

I am not insensible to the point which has been raised in this matter. I think it is fair to say that the Scottish Law Commission gave considerable thought to the question and at the end of the day it seemed that it would be better to have a general provision for publication in the Gazettes. This is because it provides means of bringing an award of sequestration to the notice of the bankrupt's creditors and to the public generally, so that sequestration will become known, so far as possible, not only to those with whom the bankrupt has transacted but also to those who might otherwise continue to transact with him or might have transacted with him in the future. So it is not only notice of the sequestration actually taking place, it is also notice to those who may at some future date transact with him in ignorance of the fact that he is sequestrated.

It is fair to say that, as the noble and learned Lord opposite suggested, the Edinburgh Gazette is not one of those papers which one finds commonly read. However, it is a paper which is read by trade associations—not normally found on top of the Clapham or any other omnibus. It is certainly considered by the Scottish Law Commission that publication serves a useful function because, through trade and other publications, it serves to inform those who are most likely to be concerned about bankruptcies, whether they be of an individual, in the sense of a person, or in the sense of a legal person, a business, so far as that business falls within the competence of this Bill.

Certainly I accept that while advertisement in the Gazettes is no guarantee that creditors and others will be informed of a debtor's sequestration, at least it affords them the possibility of being so informed. Without such advertisement, the first time that a creditor may learn about the sequestration of his debtor is when he is notified of the date of the statutory meeting under Clause 21(2). Of course, even that depends upon the creditor being known to the interim trustee.

I have listened with great care to what the noble and learned Lord opposite has said; but I think in this case, too, I must set my face against the blandishments that he has offered and I would hope that, for the reasons which I have extended, he would seek to withdraw his amendment.

Lord McCluskey

If I could make my blandishments sound more like threats, I certainly would. But I do not feel that today I can threaten the noble and learned Lord in this particular matter. I look forward with interest to his writing to me about the position of the Official Receiver, to see whether or not he is obliged to advertise in the Scottish newspaper, the Edinburgh Gazette.

When I ask the noble and learned Lord who reads the Edinburgh Gazette, he suggests that it is read not by those on top of the Clapham omnibus but by trade associations. We all know that those who travel on the top of the Clapham omnibus are either reasonable men or, alternatively, Her Majesty's judges seeking the views of the reasonable men so travelling. If there are tradesmen who are members of trade associations and debt collecting agencies who deal with Scottish businessmen who are situated in Scotland and who may therefore be sequestrated in Scotland, whether in the Court of Session or in the sheriff court, one would have thought that it would be sensible for them to read the Edinburgh Gazette. It seems a work of superfluity to require advertisement in all cases in both these newspapers.

I do not know when the Government decided to bring forward this Bill. I have already congratulated them for bringing it forward and for finding it a place in this legislative programme. It is plain that they have given some thought to certain provisions of the Bill in so far as these affect the Government themselves. But it is not entirely clear that they have really rethought and deeply thought about certain matters. This is one matter that is easy to change. It does not cost the Government any money. I hope that, despite his stonewalling today, the noble and learned Lord will go away and ask his officials and his colleagues in Government whether this is not perhaps a matter where the court should be given some discretion. In the hope, entirely based on optimism and not upon anything that the noble and learned Lord has said to me, that this may be done, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McCluskey moved Amendment No. 10: Page 15, line 38. leave out ("may") and insert ("is to").

The noble and learned Lord said: I do not know why subsection (8) of Clause 15 appears in Clause 15 at all; but it does. It provides that where a debtor learns that he may derive benefit from another estate, he is supposed to tell the person administering that estate of the fact that he has been sequestrated. It is the word "may" that disturbs me. The subsection reads: Where a debtor learns that he may derive benefit from another estate".

What concerns me is this. The word "may" envisages that he may derive benefit or that he may not. So, once a debtor learns that there is a possibility of his deriving benefit from another estate, this subsection obliges him to take certain steps; in other words, to inform the person administering that estate of the sequestration.

But suppose that the persons administering that other estate have a discretion. They may be trustees with a discretion to give money to the debtor or not. He may derive benefit from that other estate; he may not. Is he obliged to inform the trustees? What is curious is this: if he does not comply with subsection (8) and inform them of his sequestration, then he will be guilty of an offence and liable on conviction to a very substantial fine. If one is making it a criminal offence to neglect to inform the person administering the other estate that he may derive benefit, or whatever it is that he is supposed to tell them, it seems to me very odd to impose criminal sanctions upon him when the wording is so vague.

I have sought in my amendment to make a slight alteration that substitutes for the word "may" the words "is to". Accordingly, his duty, which is buttressed by a criminal sanction, is a duty to inform the person administering the other estate of the sequestration once he learns that he is to derive benefit from that other estate. Surely, that is a more sensible way to do it when one is creating a criminal offence. I beg to move.

Lord Cameron of Lochbroom

This subsection is derived, as, I think, the noble and learned Lord opposite is well aware, from the Scottish Law Commission Bill. The intention is to deal with the position where there is, or is the likelihood of, what is known as acquirenda—that is to say, assets that may become available to the estate after sequestration has taken place. The problem in the amendment, as I see it, is that the words which are sought to be substituted have the effect of restricting the duty imposed upon the debtor to notify his sequestration to certain other persons and to do it in a way which I suggest is undesirable.

It is important to ensure that the debtor should notify persons administering an estate from which he may derive a benefit as early as possible in case this affects his entitlement to benefit, as, for instance, in the case where he may be given a legacy if he is at the time solvent or is not bankrupt, and, secondly, to ensure that it results in the person administering the estate handing over the property not to the debtor but to the permanent trustee in whom such property is automatically vested by virtue of Clause 31(5).

The use of the words "is to" may introduce into the Bill what may be a fatal flaw. It may well be that the debtor is informed, for instance, by an executor that he is a beneficiary under an estate but he is not, at that point of time, told what the benefit is: that is to say, that he may derive benefit from that estate. It will only become clear when the estate is finally wound up. In that situation, it seems to me that the appropriate duty should be, at that stage, that the debtor should inform the person who is administering that other estate of his sequestration.

For these reasons, I would suggest to your Lordships that the duty that is imposed upon the debtor in the terms of this subsection is not too onerous and makes plain in my submission that the debtor is really under a duty from the moment that he becomes aware that he may derive benefit that he has to inform the person who is administering the other estate of his sequestration in order that the benefit is not lost to the estate that has become vested in the permanent trustee.

I am aware, of course, as the noble and learned Lord has reminded your Lordships, that there is a criminal sanction appended to this. That sanction, of course, was one that the Scottish Law Commission suggested in its draft Bill, a sanction which it appended to a subsection in the terms before your Lordships today. For all these reasons, I would suggest to your Lordships that this amendment may cause more difficulties than the noble and learned Lord suggests and that the form of words that appears in the Bill is a better and safer form.

Lord McCluskey

The argument put forward by the noble and learned Lord to the effect that the wording proposed will create many difficulties is an extremely bad argument. I know, because I have used it many times myself in exactly that situation. The purpose of drafting and presenting amendments in this House is not to rewrite the Bill but to raise the point of principle so that those who assist the Lord Advocate in the drafting of these Bills may assist him to do it properly. I do not even apologise, therefore, if I have got it wrong. I do not regard it as any part of my task.

Another point that the noble and learned Lord made was that the Scottish Law Commission had suggested sanctions. It did. I shall say something more fully about these matters later on. I do not regard the fact that the Scottish Law Commission dotted the entire Bill with criminal offences and attached extremely heavy penalties to the commission of them as being a very persuasive matter at all, for reasons that I shall develop later on.

4 p.m.

The next point is that I do not suggest that the duty upon the debtor is an onerous duty. All he has to do is to pass a piece of information on to somebody else, and that is easy enough. If he is supposed to do it and does not do it, perhaps he should be punished for it, but it is an odd thing in a way to impose a substantial fine upon a person who you have just rendered totally bankrupt and all of whose assets have been taken from him. I will come back to that. But what I do find difficult—I go back to it—is the use of the word "may". The duty which the debtor is called upon to perform, and the non-performance of which gives rise to a substantial fine, is a duty which is imposed upon him when something may happen or may not happen. Anything may happen, and it appears to me that he really ought to know, ought to be given more exact and precise guidance, as to the circumstances in which he is called upon to pass on this information.

I come to the last point. I simply do not understand this, either in the Scottish Law Commission provision or in the Bill itself. I do not understand why the duty which is imposed upon the debtor is a duty to tell the person who is administering that other estate. Why does not the duty arise upon him to tell the interim trustee, and then the interim trustee can take whatever measures he deems necessary to inform the person or persons administering the other estate? I am puzzled by this. I think it is an ill-digested subsection and I hope that the Lord Advocate will give further consideration to this before the Bill reaches its final destination.

The Deputy Chairman of Committees (Lord Nugent of Guildford)

Does the noble and learned Lord wish to withdraw the amendment?

Lord McCluskey

I apologise to the Committee. I should have added that I wish to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 15 agreed to.

Clause 16 [Petitions for recall of sequestration]:

On Question, Whether Clause 16 shall stand part of the Bill?

Lord McCluskey

May I say just one word about Clause 16? I should perhaps have put down an amendment in relation to this matter. Your Lordships will have seen in the earlier clauses that when the petition is presented to the court for the sequestration of a debtor it can go either to the Court of Session in Scotland, which is the higher court, or it can go to the local court, the sheriff court. But under Clause 16 a petition for recall of an award of sequestration may be presented to the Court of Session but not to the sheriff court. It is not easy to understand why that should be so and I wonder whether the Lord Advocate is able to explain why it is that under Clauses 16 and 17 the jurisdiction is exclusively that of the Court of Session and there is no jurisdiction in the sheriff court. I think this was a point which was raised by the committee of the Law Society of Scotland in the document to which I have referred, and I trust therefore that, although I have not given notice of it by way of amendment, the Lord Advocate will be able to deal with the point on the Question, Whether the clause shall stand part?

Lord Wilson of Langside

I wonder if I may add a word on this. I am very glad that the noble and learned Lord, Lord McCluskey. raised this point. It would be possible, of course, to give the jurisdiction in the matter to the sheriff principal, if that were thought to be desirable. That would certainly be less expensive than going to the Court of Session and almost invariably—not invariably but almost invariably—much quicker.

Lord Cameron of Lochbroom

This clause derives from a recommendation of the Scottish Law Commission; I refer in particular to paragraph 84. The reasons for retaining the jurisdiction of the Court of Session—as noble and learned Lords opposite will know, it had, and has presently, exclusive jurisdiction in such petitions for recall—is that the Scottish Law Commission considered that it remained the appropriate forum because, although the petition for recall is not, strictly speaking, an appeal, it will very often call into question the basis of the original award. So it appeared to the Scottish Law Commission—and it is a point with which I am bound to say I am sympathetic—that a petition for recall may effectively be an appeal.

Moreover, there may be a case where, in the special case of recall on the ground that there is another sequestration, the Court of Session may be the only appropriate forum. Finally, the Scottish Law Commission took the view that in a number of cases the grounds upon which recall of the award of sequestration might proceed would be analogous to a decree of reduction or an action for decree of reduction. In principle, although I am aware that jurisdiction is being extended, these fall within the exclusive jurisdiction of the Court of Session.

I have gone into this in some little detail, really setting out what appears in the Scottish Law Commission's arguments on this matter. I should say that these clauses have been subjected to discussion with the Law Society and the Institute of Accountants. I would suggest to your Lordships that, at the end of the day, it is appropriate that the jurisdiction in petitions for recall of an order of sequestration should, for these various reasons, remain with the Court of Session.

I think this again is a point which may weigh with your Lordships; and I suggest that it should. It would entitle a uniformity to and consistency of the reasons for recall of sequestration to be accorded more easily than would be the case if the jurisdiction were to be extended elsewhere. Accordingly, for these reasons, the Bill provides in this clause an exclusivity of jurisdiction in the Court of Session.

Clause 16 agreed to.

Clause 17 agreed to.

Clause 18 [Interim preservation of estate]:

Lord McCluskey moved Amendment No. 11: Page 18. line 39, at end insert— ("(h) appoint a solicitor and remunerate him.").

The noble and learned Lord said: What Clause 18 of the Bill does, among other things, is to give the interim trustee, as the person who is charged with the preservation and interim management of the debtor's estate, certain powers. They are set forth in subsection (2), paragraphs (a) through to (g) He is empowered to effect or maintain insurance policies, close down the business, recover articles, and that kind of thing; and what my amendment does is to add to that list of powers power to appoint a solicitor and to remunerate the solicitor.

I could give your Lordships one guess as to where that suggestion came from. It came from the Law Society of Scotland, which, of course, represents solicitors in Scotland. None the less, it has merit. It may be that the amendment is entirely unnecessary because, given the powers of the trustee under that clause, and his duties and functions as set forth under Clause 2 of the Bill to safeguard the estate, and so on and so forth, it may well be that he in fact has an implied power to appoint and to remunerate a solicitor, anyway. It would be sufficient for my purpose if the noble and learned Lord the Lord Advocate were able to assure me that the Bill does in fact empower the interim trustee to engage a solicitor, if that is necessary, and to remunerate him, and, if so, perhaps the noble and learned Lord could tell me where that is referred to in the Bill. I beg to move.

Lord Cameron of Lochbroom

The Bill was drafted on the basis that there was no need to confer upon either the interim or the permanent trustee an express power to appoint or remunerate a solicitor. Indeed, as the noble and learned Lord opposite will be aware, there are subsequent clauses which imply that both the interim and the permanent trustee have this power.

However, this amendment is defective and for that reason I would suggest that it should be withdrawn because its effect, in view of the opening words of Clause 18(2), is merely to entitle the interim trustee to employ a solicitor for one of his functions and not for others. Nevertheless, the intention of the amendment causes me to consider that there is some doubt about the power of an interim and a permanent trustee to appoint and remunerate solicitors, and there is merit in looking at the Bill again in this connection in order that doubt about the matter may be removed. Accordingly, if the noble and learned Lord will withdraw his amendment I would be willing to undertake that the matter will receive further consideration either in subsequent proceedings in your Lordships' House or in proceedings in another place. Perhaps I should say that that may be the only gleam of sunshine that I can give to the noble and learned Lord this afternoon.

Lord McCluskey

I do not know whether any of your Lordships have played darts; but if you throw 11 darts at a dartboard and the first 10 hit the wire, you are very grateful when one eventually goes in, even if it does not score. So I am sorry that my enthusiasm for the early part of what the noble and learned Lord said is now rather dampened by the quite unnecessary bleakness of the quite unnecessary remark that he made at the end. However, taking small comfort from what he has said, I look forward to the noble and learned Lord coming forward with what he would no doubt describe as an effective amendment. I therefore beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McCluskey moved Amendment No. 12: Page 19, line 26, at end insert ("without reasonable excuse")

The noble and learned Lord said: I beg to move Amendment No. 12 and I should also like to speak to Amendment No. 13 because the two amendments go together. Amendment No. 13: Page 19, line 27, leave out ("without reasonable excuse")

Your Lordships will see that the amendments relate to Clause 18(5) of the Bill. The question of offences under the Bill is an important one. In this particular case I can draw attention to certain matters that are special here although they also apply more generally.

First, the debtor shall be guilty of an offence under the Bill if: (a) he fails without a reasonable excuse to comply with certain directions given to him by the interim trustee or indeed if he fails to comply with a requirement which is imposed upon him by the interim trustee. That is no doubt quite right. The interim trustee has power to give him directions and to make requirements, and if he does not comply with them he is guilty of an offence unless he has a reasonable excuse.

However, when we come to subsection (5)(b) we find that he shall be guilty of an offence if: he obstructs the interim trustee where the interim trustee is acting in pursuance of subsection (3)(b) above"— that is the subsection which empowers the interim trustee— to enter the house where the debtor resides... and to search for and take possession of anything mentioned in paragraphs (a) and (c) of subsection (2) above, if need be by opening shut and lock-fast places".

This power is rather similar to the powers of certain tax gatherers which have been much disapproved in debate in this and other places. I am referring to the power of the interim trustee to go into a house at any time of the day or night in order to seize the articles, valuables, documents, and so on—including perishable goods and the like—which are referred to in subsection (2)(a) and (c). So the Scotsman's home is not in any sense his castle because the interim trustee can come in, and furthermore if there is any obstruction whatever placed in his way by the debtor, the debtor can be punished.

4.15 p.m.

What punishment can be imposed upon the debtor? It is five years' imprisonment on indictment in the High Court. That is what is competent under the Bill and I hope that the noble and learned Lord will acknowledge that. What the Bill is therefore saying—if I may put it in a slightly different way—is that if the trustee comes along at three o'clock in the morning and demands entry to the house in order to search for some article and the debtor says, "No, come back in the morning. I shall not let you in", then technically the debtor can be indicted in the High Court and sent to prison for five years. Of course the Lord Advocate would not be so daft as to indict him in the High Court in those circumstances and I hope the court would not be daft enough to give him five years' imprisonment. But that is the scheme under the Bill. With all due respect to the Government, it seems to be a crazy scheme.

In my submission, what we should permit here is that a person who is charged with obstructing the interim trustee should be able to come forward and say, "Well, I had a reasonable excuse". Indeed, there might well be particular circumstances. Let us suppose, for example, that the trustee arrives on the doorstep at eleven o'clock at night or at six o'clock in the morning. Let us suppose that at that moment the debtor's wife is dying or his child has fallen ill or some other personal disaster has overtaken him. Surely in those circumstances he ought to be able to say to the trustee, "No, come back in the hours of daylight". He ought therefore to be able to come to the court if he is charged with obstruction and say, "I had a reasonable excuse".

If the Government are not prepared to accept the principle of the amendment which affords the defence of reasonable excuse to a charge of obstruction which carries with it the possibility of five years' imprisonment, then I shall certainly on another occasion seek to persuade the House to amend the Bill. I have not the slightest doubt that I can be told that the amendment that I have proposed is technically defective. I hope that the Lord Advocate will not waste his breath telling me that because I do not intend to press the amendment today. The principle however is quite clear, and I should be surprised if the Lord Advocate were able to defend a principle which deprives a man of a "reasonable excuse" defence when on a charge of this kind and in the type of circumstances which I have envisaged. I beg to move.

Lord Cameron of Lochbroom

The intention of the subsection which the noble and learned Lord seeks to amend is related to the provision in subsection (3) which permits a court: on cause shown, to grant a warrant authorising the interim trustee to enter the house where the debtor resides or his business premises and to search for and take possession of anything mentioned in the preceding paragraphs: if need be by opening shut and lock-fast places". The noble and learned Lord opposite will be aware of the offence of obstruction such as found in Section 41(1) of the Police (Scotland) Act 1967, which makes it an offence to obstruct a constable in the execution of his duty. In that instance there is no provison for the defence of reasonable excuse, and a constable may of course be acting upon the authority of a warrant. There is a strong argument for the view that an interim trustee, executing a court warrant, should be in no worse a position than that of a constable who is similarly carrying out his duty in executing a warrant.

However, in view of what the noble and learned Lord has said, and in particular as he has related this matter to the question of penalty, which appears in subsection (6). it would only be right that at this stage I say that I should like to give further consideration to all the criminal offences and penalties in the Bill.

There is the possibility that there may shortly come before your Lordships another Bill which concerns personal insolvency in England and Wales and corporate insolvency in the United Kingdom. There is a strong argument that, so far as possible, there should be harmonisation of the substantive nature of the offences and of the penalties which attach in personal insolvency throughout the United Kingdom. I have no doubt that that is a matter upon which your Lordships would agree.

Accordingly, if the noble and learned Lord opposite is prepared to withdraw this amendment and others which would appear to be related to the same issue, I undertake that further consideration will be given to the nature of the penal sanctions and, indeed, of the criminal offences which appear in this Bill and, in particular, to the matter of the appropriate jurisdiction in relation to certain of them.

However, in giving that undertaking to give further consideration, I would, of course, have to consider in particular the question of the offence which is proposed in subsection (5)—that of obstruction—in the general context of harmonisation. I have set out to the Committee the reasons why it was felt that this offence should be one of absolute liability. Indeed, while I merely pray it in aid, this again follows a suggestion which was made by the Scottish Law Commission in its draft Bill. However, I am not insensible to the point which has been raised by the noble and learned Lord and, accordingly, for these reasons, if the noble and learned Lord is prepared to withdraw this amendment, I give that undertaking. It may be that this will give him some cause to consider his position in regard to later amendments which have been tabled in his name.

Lord McCluskey

I should like to reply to one or two points which the noble and learned Lord the Lord Advocate has raised. First, one can easily read in the Bill that the interim trustee has no power to enter someone's house, either in the middle of the night or at any other time, unless he has first obtained a warrant from the court. But the fact of the matter is that in most cases in Scotland the courts—and I have no doubt that they will follow the same practice in this case—grant warrants for the asking, despite the presence in statutes of this and other kinds of the words "on cause shown".

Therefore, if the interim trustee (who is appointed from the list of persons who may be appointed as interim trustees) appears before the court and says, "I have good reason to think that the debtor may be concealing something in his house or may be thinking of taking it away from his house", the court will instantly grant the warrant. So a warrant is there for the asking in 999 cases out of 1.000.

The second argument that was put forward is, in my submission, not a respectable one. It is the argument that there is similar wording in Section 41(1) of the Police (Scotland) Act 1967. The noble and learned Lord the Lord Advocate is saying that when a policeman is carrying out his duty, a person who obstructs him is guilty of an offence and cannot put forward the argument that he had a reasonable excuse. I can understand that because it must be assumed—and I shall certainly assume it for the purposes of this argument—that when a policeman is carrying out his duty he is doing so on behalf of the whole community and the interest of the community in the preservation of law and order is strong enough to say that the policeman shall not be obstructed. I support that. I would support it if that particular section were being re-enacted in your Lordships' House.

However, to argue from the community interest as represented by the policeman upholding law and order to the private interest of the interim trustee who is enforcing the rights of creditors is, in my submission, not respectable and not a logical step. I suggest to the noble and learned Lord the Lord Advocate that he will lose little, if anything, if he reconsiders this matter and allows the accused person to argue reasonable excuse in particular circumstances.

On the matter of penalties I would make two comments. First, although I have the highest possible regard for the Scottish Law Commission, I believe that if it has a weakness—and it has—it lies in relation to criminal matters. If one looks at its membership, or the membership of this Committee, one does not think that the Scottish Law Commission is quite as well decorated with talent in relation to criminal matters as it is in relation to civil matters, and I do not think that it has quite as sensitive a touch in relation to criminal matters as it has in relation to civil matters. Therefore, on that particular point I do not find the authority of the Scottish Law Commission very convincing.

On the question of penalties generally, of course I should be happy for the noble and learned Lord the Lord Advocate to reconsider the matter, and I have no doubt that I shall accept his invitation to withdraw the amendment. However, I intend to move some of the amendments because I have deliberately chosen some of them in order to enable me to put forward certain considerations to which the noble and learned Lord the Lord Advocate might want to have regard in due course. For the moment, and encouraged by an unexpected thaw in the noble and learned Lord's approach, I beg leave to withdraw this amendment.

Amendment, by leave, withdrawn.

[Amendment No. 13 not moved.]

Lord McCluskey moved Amendment No. 14: Page 19, line 35, leave out subsection (6).

The noble and learned Lord said: I beg to move Amendment No. 14. This is also an amendment to the same clause and it specifically raises the question of penalties. Subsection (6) of Clause 18 provides the penalties which are appropriate in relation to the offences of which we have just been speaking; that is to say, the offences of obstructing the interim trustee or failing to comply with a direction or a requirement. Noble Lords will see that subsection (6), first, renders the debtor who has failed to comply with the direction or who has obstructed, liable on summary conviction to a fine not exceeding the statutory maximum. That means that usually in Scotland he will be brought before a professional judge—in fact, I believe the words "on summary conviction" invariably mean a professional judge—and he can then be fined.

I should like to know why the noble and learned Lord the Lord Advocate and, for that matter, why the Scottish Law Commission thought it appropriate to award fines of £1,000 against persons who have no assets and who apparently under this Bill cannot have any assets for the next three years. What does one do when one imposes a fine of £1,000 and the debtor cannot pay it? Does it mean that he goes to prison?

Secondly, what is deeply worrying is that the latter part of subsection (6)—that is to say, paragraph (b)—raises the matter to which I referred earlier. It states: on conviction on indictment to a fine or to imprisonment for a term not exceeding 5 years or to both".

4.30 p.m.

Why on earth should a person who has been guilty of a failure to comply with a direction or with a requirement by the interim trustee, or who has obstructed the interim trustee when he was trying to enter his house in the middle of the night, be liable to be sent to prison for five years? It makes absolutely no sense.

I know, and the Lord Advocate knows even better than I, that at the moment, for perfectly understandable reasons, the High Court in Scotland is totally choked with cases. There are so many criminal cases to be heard between now and the early spring that the 110-day rule, of which we in Scotland are very proud, will be breached a number of times. The court will have to grant extensions of the period of imprisonment before trial. I understand that there will be as many as 12 judges sitting and hearing criminal cases, instead of the usual three, in the run-up to Christmas. There is a shortage of prosecutors, a shortage of defence counsel, and the whole thing is in a terrible state.

I do not see any early resolution of that kind of problem in the High Court in Scotland, so it becomes something of a nonsense to suggest that we might send debtors to the High Court because they told the trustee in the middle of the night to go away and come back the next day. The Lord Advocate cannot really intend ever to use this provision, which entitles him to indict people in the High Court for this kind of trivial offence. In my submission it is a nonsense. It is a nonsense which has been taken from the provisions contained in the draft Bill by the Scottish Law Commission.

I hope that the Lord Advocate can (as briefly as he likes, because he has already said something about this matter) give the Committee the assurance that this is one of the points he will take on board and reconsider. A different kind of consideration arises in relation to other offences, but in this case it is quite beyond my comprehension why this trivial type of offence should attract the possibility of five years' imprisonment.

The last thing I want to say on it is that when we find the statute laying down a maximum penalty and we find that in practice the average penalty is a minuscule percentage of what the statute allows as a maximum, then the law itself begins to fall into disrepute. The statutory maxima must be related in some way to what the courts will do. That cannot be said, in my submission, of this particular provision, and I hope to hear the Lord Advocate acknowledge that it is worthwhile considering it very closely again. I beg to move.

Lord Cameron of Lochbroom

Obviously, in view of what I said just now, I undertake to look at this among other matters, and in particular to take aboard the points which the noble and learned Lord has made.

I should perhaps say that while the noble and learned Lord has obviously and perfectly reasonably pointed out that this subsection covers the question of obstruction, in subsection (5) it covers the different offence of failing, without reasonable excuse, to comply with certain directions or requirements. These can be directions of varying qualities, some of which may have been intended to save the creditors from very substantial loss, and therefore refusal to obey such a direction might well be a serious matter in certain circumstances.

But I am content at this stage simply to say that I have listened very carefully to what has been said by the noble and learned Lord opposite, and in these circumstances I am prepared, as I have said already, to look at this clause, among other matters, in order to achieve, first, the harmonisation to which I referred and, secondly, to look at it again in the light of the particular arguments that have been addressed to your Lordships today by the noble and learned Lord.

Lord McCluskey

The Lord Advocate has specifically referred to the directions that may be given under subsection (1). That makes matters worse for him, not better, because under Clause 18(1), The interim trustee may give general or particular directions to the debtor relating to the management of the debtor's estate". As I read the Bill, there is no restriction whatsoever imposed upon the interim trustee as to what direction he may give. He can give any direction which in his discretionary judgment relates to the management of the estate. That direction, if not complied with without reasonable excuse, can attract the penalty of five years' imprisonment.

I do not want to develop this because the Lord Advocate will consider it again, and therefore I do not want to waste the Committee's time. But the words "without reasonable excuse" do not necessarily relate to the quality of the general or particular direction. The words "without reasonable excuse" would normally be interpreted by a court to relate to a subjective assessment, as it were, objectively considered by the court in relation to the debtor's own position but not to the quality of the direction that is given. I do not think the reference to subsection (1) improves the Lord Advocate's position: it worsens it. I think he is conscious of that, but I need not ask him to respond.

For the moment, I am content to withdraw this amendment, and in the circumstances I do not intend to move Amendment No. 15.

Amendment, by leave, withdrawn.

[Amendment No. 15 not moved.]

Clause 18 agreed to.

Clause 19 [Debtor's list of assets and liabilities]:

On Question, Whether Clause 19 shall stand part of the Bill?

Lord McCluskey

There is no amendment down in relation to Clause 19, but I want to draw your Lordships' attention to certain of its provisions because they have a bearing on an amendment which comes later.

Under Clause 19 the debtor is to deliver to the interim trustee a list of his assets and liabilities in a certain form. Your Lordships will see that, under subsection (2), if a debtor, without reasonable excuse, makes a material misstatement in that list of assets and liabilities, then he is liable to be found guilty of an offence and to be fined. What I think that clause does—and I think it does it quite sensibly—is to require him to do certain things; to accompany that requirement with a criminal sanction, and to give the debtor the opportunity to prove that he has failed to comply with it and has a reasonable excuse for his failure: and, furthermore, if he makes what is a false statement, a material misstatement, then he is liable to be fined but not to be sent to prison.

The reason I draw attention to that is that when we come to consider other provisions about penalties we shall find that where, in other circumstances, the burden of proof is put upon the debtor, if he makes a material misstatement he is liable to be sent to prison for five years. I merely point to this clause as being the sensible way to deal with the penalties, and later I shall contrast this clause with other clauses where the non-sensible path is followed.

Clause 19 agreed to.

Clauses 20 and 21 agreed to.

Clause 22 [Submission of claims for voting purposes at statutory meeting]:

Lord McCluskey moved Amendment No. 16: Page 22, line 23, leave out from ("offence") to ("reason") in line 24 and insert ("if the court is satisfied that he knew or had good").

The noble and learned Lord said: Clause 22, as your Lordships will see, is a clause which governs the submission by creditors of statements of claim. So the creditor has an opportunity provided under this clause to tell the interim trustee what he believes is owed to him by the debtor.

Under Clause 22(5), if the creditor produces under this section a statement of claim which is false then the creditor shall be guilty of an offence. Your Lordships will see that that is rather similar to the kind of thing that the debtor does under Clause 19, where he makes a material misstatement in his list of assets. In this case, the creditor makes a false statement of his claim.

What the clause goes on to say is that the creditor shall be guilty of an offence unless he shows that he neither knew nor had reason to believe that the statement of claim was false. Any lawyer—and I am sure that your Lordships who are not lawyers will equally recognise the point—will recognise that that puts the burden of proof upon the creditor. Once the prosecutor establishes that the statement of claim is false then it is up to the creditor to prove his innocence. What does a false statement of claim mean? It simply means a statement of claim that is not accurate. Subsection (4) reads: A creditor who has produced a statement of claim in accordance with subsection (2) above may at any time before the statutory meeting produce in place of that statement of claim another such statement of claim specifying a different amount for his claim".

Subsection (4) is entirely reasonable and sensible and what it acknowledges is the possibility that the creditor may have made a mistake. Of course, he may have done so. He may have his records kept on a computer and the computer may have got fouled up in some way and he may therefore submit an entirely false statement of claim. He may not properly have recorded a part payment of the outstanding debt and so he submits a wrong claim. Subsection (4) permits him to correct it. But subsection (5) says that if he does it, if it is false, then he is instantly guilty of an offence unless he can discharge the burden of proof which is laid upon him. And it gets worse because, as the Committee will see from subsection (10), he can go to prison for five years and be indicted in the High Court.

So, once again, taking these various provisions together, we have got the onus of proof put upon the accused person; we have got a failure to reconcile the human possibilities of error in subsection (4) with the provisions in subsection (5); and we have got once again the threat in terrorem of an indictment in the overcrowded High Court and of languishing in Peterhead or Barlinnie for five years—which is a nonsense in relation to this particular matter.

If the Lord Advocate thinks, as he may well think, that there could be circumstances in which a creditor, in order to enhance his return in the sequestration, puts forward a totally bogus and fraudulent claim, then that constitutes at common law a criminal offence and that can be indicted in the High Court or the sheriff court or taken in the summary sheriff court just as the prosecutor chooses. So the Lord Advocate would be free in a particular case to prosecute a particular villain in the High Court as he chose; but it should not be done under the provisions of the statute. This raises in a different form another aspect of the nonsense that pervades the entire Bill in relation to the question of penalties. I beg to move.

Lord Cameron of Lochbroom

I am sure that if the noble and learned Lord opposite were appearing for a creditor in the position which he has envisaged—namely, having been proved to have produced a statement of account which was false—and then went on to show that it was a computer mistake he would be quick to fix upon the words, unless he shows that he neither knew nor had reason to believe that the statement of claim, account, voucher or other evidence was false", as giving him a clear way out.

4.45 p.m.

The purpose of this offence is quite clear. It is intended to require the prosecution to prove that the creditor has produced a statement which is false. Thereafter, since it is the creditor's own statement and the intention behind this Bill is that a creditor shall produce accurate statements for the purposes of the statutory meeting, ones which he can be expected to check, it would be clear, in my view, that the ordinary bona fide creditor would not permit a false statement to go forward unless there were the kind of circumstances in which he could excuse himself, and do so adequately, by invoking the words, unless he shows that he neither knew nor had reason to believe that the statement of claim, account, voucher or other evidence was false"— just the kind of accounting error to which the noble and learned Lord opposite points.

The effect of the amendment would be to put upon the prosecution an impossible burden; not only to show that the creditor had produced a statement of claim which was false but also that he, the creditor, knew or had good reason to believe that it was false. In my submission, as the Committee will fully understand, that would be a quite impossible burden for a prosecution to undertake. Indeed, they would be required to prove matters which were within the accused's own knowledge or surrounding facts and circumstances from which that knowledge could be inferred. In these circumstances, the effect would be to make this a wholly worthless sanction. Plainly, it is appropriate to ensure that creditors produce accurate accounts of claim and to have some criminal sanction attached. I would suggest that this purpose would be better achieved by leaving the clause as it is than by amending it in the way which is proposed.

Lord McCluskey

The Lord Advocate has sought to persuade the Committee that what the amendment does is to place an impossible burden upon the prosecutor. What the amendment does of course is to invert the onus and put the onus back where it normally is, upon the prosecutor, by saying that the creditor shall be guilty of an offence if the court is satisfied that he knew or had good reason to believe that the statement was false. That is a very normal kind of burden which rests upon a prosecutor. But the nonsense of the Lord Advocate's reply, with respect, is shown by the very next line of the Bill, where it says under Clause 22(5)(b): The debtor shall be guilty of an offence if he knew or became aware that the statement of claim was false.". So that the very burden which is impossible to discharge in relation to the creditor is one which the Government are gaily imposing upon the prosecutor in relation to the debtor: namely, proving the state of the debtor's awareness.

How that reply can be justified in the light of subsection (5)(b) I am afraid I cannot understand. I hope that the Lord Advocate when he is looking at this matter with his advisers will consider it again. Of course, it is perfectly right and I would acknowledge instantly that, if I were appearing for a creditor charged with an offence under Clause 22(5)(a) and I could demonstrate that the fault had been caused by some computer error, I should do so. But why should the burden of proof be laid upon the accused person? It might be extremely difficult for me to show why the error was committed. It might be that the computer operator had died or had been lured away to another business and that I could not get anyone to explain precisely why the claim came off the computer in the particular form it did. It might be difficult for me, particularly in these days of computers, to demonstrate why the error had been made. But, in any event, I still have not had any satisfactory answer to my point that while subsection (4) acknowledges the possibility of human error and allows for its correction, subsection (5) puts the onus on the person who makes it and subjects him to this frightening penalty. I hope that the Lord Advocate, looking at the question of penalties generally and bearing in mind the debates on the question of onus, will give this matter some further thought. In that hope, I beg leave to withdraw this amendment.

Amendment, by leave, withdrawn.

[Amendment No. 17 not moved.]

Clause 22 agreed to.

The Deputy Chairman of Committees

Unless noble Lords wish to raise any point on Clause Stand Part, I propose to move the next group of Clauses 23 to 27 en bloc

Clauses 23 to 27 agreed to.

Clause 28 [Removal of permanent trustee and trustee not acting]:

On Question, Whether Clause 28 shall be agreed to?

Lord McCluskey

May I just, in relation to Clause 28, ask the Lord Advocate, perhaps not on this occasion but on some other occasion, or by letter to me, to explain one point? In Clause 28 it says that the permanent trustee may be removed from office, and I look at Clause 28(l)(b) where it says— on the application of… the commissioners", among others. The Law Society of Scotland, in their memorandum, asked that the commissioners, or a majority of the commissioners, should have power to petition and I wonder whether the power to remove the permanent trustee from office is one that can be exercised by the sheriff on the application of all the commissioners only, or whether a majority of commissioners would be able to do so. That I do not think is clear—it is certainly not clear to me—and it would be helpful if the Lord Advocate could clarify it.

Lord Cameron of Lochbroom

Clause 28(l)(a), read with paragraph 13 of Schedule 6, alters the existing law under which a trustee may be removed only by a majority in number and value of the creditors. The new proposal is that the trustee shall be removable simply by a majority in value of the creditors. I trust that provides the answer which my noble and learned friend seeks.

Perhaps I should also say that so far as the sheriff is concerned—I think, again, this was a matter which the noble and learned Lord was asking about—paragraph (b) permits the sheriffs power under this subsection to be exercisable by the accountant in bankruptcy, the commissioners or a person representing not less than one-quarter in value of the creditors. Those are the persons who would be entitled to come forward and seek an order of the sheriff under Clause 28(1)(b).

Lord McCluskey

I was in fact concerned with the position of the commissioners. Under Schedule 6, it says that a quorum at a meeting of commissioners shall be one commissioner and that the commissioners may act by a majority of the commissioners present. I rather like that provision: if you are the only one there, you constitute a majority. It seems a reasonable point, but what is not clear is whether, when you go to the sheriff, you can go as a majority or whether the application has to be the application of all the commissioners. It is a point of very small detail but I raise it because it arises out of the Law Society's observations. I would be content if the Lord Advocate would deal with that specific point on another occasion.

Clause 28 agreed to.

The Deputy Chairman of Committees

Unless noble Lords have any points to raise on the intermediate clauses, I propose to move Clauses 29 to 47 together.

Clauses 29 to 47 agreed to.

Clause 48 [Order of priority in distribution]:

Lord McCluskey moved Amendment No. 18: Page 50, line 12, leave out subsection (2) and insert— (" (2) In this Act "preferred debt" means—

1. (a) any wages or salary of any person in respect of his employment by the debtor during the 4 months immediately preceding the date of sequestration or, in the case of a deceased debtor, the date of his death, such preferred debt not exceeding £800 or such sum as may be prescribed to any one person;
2. (b) any advance made by a person for the purpose of, and used for, the payment of any such wages or salary as aforesaid payable in respect of such period as is mentioned in paragraph (a) above but only to the extent by which the preferred debt under the said paragraph has been diminished by reason of such payment; or
3. (c) any accrued holiday pay which under a person's contract of employment with the debtor would in the ordinary course have become payable to him in respect of the period of a holiday if his employment by the debtor had continued until he became entitled to a holiday;

and in paragraphs (a) and (b) above "wages or salary" includes any remuneration in respect of a period of holiday or of absence from work through sickness or other good cause.")

The noble and learned Lord said: This is the most important matter, and I think the last matter of independent substance here. This is the matter which I referred to in the course of the Second Reading of this Bill, and it concerns Crown preference. In Clause 48, the Bill itself follows the general principles of the draft Bill prepared by the Scottish Law Commission in all material respects save one, and that is Clause 48 (2), where it says that, 'preferred debt' means a debt listed in Part I of Schedule 3". Part I of Schedule 3 makes it plain that the Crown preference is to continue. This is a matter of considerable importance and it has attracted some attention both before and after the Second Reading of the Bill by your Lordships. I have already spoken on several occasions about the bankruptcy committee of the Law Society of Scotland. It has indicated both before and after the Second Reading that the Committee wishes Crown preference to be disbanded. I have received a communication from the National Federation of Self-Employed and Small Businesses Limited—I am not sure precisely what I am doing on the same side as the National Federation of the Self-Employed and Small Businesses Limited, but they utterly oppose this provision in the Bill, for reasons which I think are perfectly understandable.

What they say, and what I adopt, is that the tax system in this country, for reasons which are understandable, turns employers and businesses into unpaid tax collectors. The employer collects the PAYE and the businessman-employer collects PAYE contributions and also collects VAT, for example. There are various other sums of money which he collects on behalf of the Government; so he is an unpaid tax collector on behalf of the Government. Then the tax system, having so appointed the businessman, allows him to mix the unpaid tax monies with his other funds and the creditor looking on from the outside cannot distinguish which is tax money and which is not. It allows the businessman to be a debtor to the Revenue or to the Customs and Excise or other such bodies in respect of the sums of money owed to them.

I ask: is it any different for the businessman to be a debtor to the Revenue from being a debtor to somebody else who has advanced him money? If I go to a builder and say that I want certain works done to my roof, he may say "I am afraid I need to have £500 or £ 1,000 from you in advance to pay for materials, and so on." If I give the money to him and he then goes bankrupt, my debt is deferred until the Crown's debt is met; and the justice of it is not at all obvious.

The Lord Advocate dealt with the matter briefly in the course of his Second Reading speech to your Lordships, but the matter is dealt with very much more fully in the Scottish Law Commission Report No. 68, which is referred to on the front of the Bill itself. That report makes it plain—and I will not repeat all the arguments—that Crown preference was introduced into Scotland in 1707 at the time of the Treaty of Union, and the main framework or principles of Crown preference were established by the end of the 19th century; so it is a matter of some long standing. But, of course, since the Second World War there has been a great expansion in the kinds of debts which fall into the definition of preferred debts. For example, VAT did not exist before: that came in in the early 1970s, and the Crown has a preference in respect of that. On page 217 of the report the Scottish Law Commission refers to this great expansion since the Second World War. What has happened is that gradually, as one tax preference has been added to another, there has been a substantial growth in the amount of preference debt and a corresponding worsening in the position of the ordinary creditor.

5 p.m.

Against that background, the Lord Advocate presented to the House certain arguments at Second Reading. In col. 527 of the Official Report for the 20th November, he presented the argument which of course was considered by the Scottish Law Commission. He said: In the first place, there is a significant difference between taxed and non-taxed debts in that the former are imposed by law—a law passed by Parliament—whereas the latter are incurred by agreement.

Well, I can see a difference. There is a difference between a cow and a horse, but so what? The fact that some are imposed by law and some are incurred by agreement does not make the slightest difference. It is a non-sequitur to say that because tax debts are imposed by law therefore they should be accorded preference. Is that any more logical a statement than saying, "Tax debts are imposed by law; therefore they should not be accorded a preference"? It is a total non-sequitur to say that because they are different in that character there should be a different result. I should like the Lord Advocate to spell out the major premise of that logical statement, if there is one, and the minor premise, and then we shall be able to test his logic. It is a bald statement which in my submission does not mean very much.

In any event, to suggest that private debts are incurred by agreement is a totally unrealistic statement. If, for example, I am a supplier of materials to this unfortunate builder—I do not know why I constantly think of builders going bankrupt but perhaps the history of the past few years points to the validity of that example—if I am supplying tiles, paint, timber or whatever to a builder, do I really have a choice about whether I will supply or not and give him credit because if I do not he will go and buy them from somewhere else? So I have to give him credit. My agreement in the matter is a totally irrelevant consideration. If I am a supplier of goods and materials and I say to every trade customer, "You pay in advance", I will end up with very few customers. Therefore it is standard to allow credit. To suggest that the private debts are therefore incurred by agreement is, in my submission, a somewhat disingenuous statement of what the true position is. That argument was considered by the Scottish Law Commission and was rejected. Your Lordships will find that in the report.

The second argument was that certain debts such as PAYE—various others were mentioned—are debts which represent moneys which a debtor has deducted or collected, acting as an agent for the Government. That is just the argument to the effect that the debtor has been turned into an unpaid tax collector and therefore the Government ought to have preference. Again, I am afraid that the logic of that totally escapes me. It is a wholly artificial argument, and the noble and learned Lord ended up by saying: It surely cannot be right that the statutory provisions enacted for the more convenient collection of revenue should inure to the benefit of private creditors".

Statements and assertions of what cannot be right will not do in place of argument. We really have to have some logical demonstration that, because the unpaid tax collectors have in-mixed the gatherings with their other debts and not paid them to the revenue, therefore the creditors should, in effect, wait until the revenue has been satisfied. In my submission, the argument that I put forward could be put forward quite shortly: a debt is a debt. It does not matter whether the creditor is Her Majesty's Government or the private builder.

The third argument put forward by the Lord Advocate was: It is not open to the revenue departments to protect themselves in the same way as, for example, a commercial creditor can". That again supposes that the commercial creditor, who has to sell his supplies to as wide a market and to as many customers as he can, can go along and say to each customer, "By the way, you can have £1,000 of paint or £2,000 of timber but before you get it will you come to my solicitor's office and we will sign a document which will give me certain rights over the timber and the paint". It is totally and utterly unrealistic. One would not last five minutes in business if one insisted upon arrangements of this kind in the course of trading. No doubt that is why it is the federation of small businesses and the self-employed which offer their support to me in making this argument. While the big creditors, the big businesses, may be able to withstand these losses from time to time, the small businesses cannot do so. If the small businessman suffers a substantial loss, he himself may go out of business. If he is to be deprived of the opportunity of having his debt met, one could have a knock-on effect and one business after another—all being small businesses—would begin to fail. In my submission, the arguments that have been put forward are not good arguments.

The fourth argument, which I call the inertia argument, is to the effect that this has been going on for rather a long time. This argument appears in col. 527 of the Official Report where we are told that the Government take the view that the existing arrangements should be maintained".

I am surprised to hear from a Member of this Government that the Government seem to think that the existing arrangements should be maintained. I thought that one of the features of which the present Government were proud was that they are a friend to small business and that they want to change existing arrangements—otherwise they would not be selling British Telecom and would not be going to sell British Airways. They want to change the existing arrangements. They want, for example, to abolish the GLC. They show a certain consistency in wanting to change things. To put forward in the course of this debate an argument that the existing arrangements should be maintained comes very ill from the Lord Advocate.

May I summarise the matter in this way? This Crown preference causes inequality among the creditors. It causes uncertainty and delay in sequestrations. It discourages sequestration by creditors. It discriminates against small businesses. It is not based on any principle whatsoever. It tends to cause knock-on bankruptcies by depriving the creditors of any substantial benefit in any particular sequestration. In my submission, it ought to be abolished. The purpose of this amendment is to achieve that abolition and to introduce into the Bill the very provision which the Scottish Law Commission itself recommended after a detailed consideration and weighing of the arguments—the abolition of Crown preference. I beg to move.

Lord Cameron of Lochbroom

I strongly oppose this amendment; and at the start, may I underline again that the principle of Crown preference is one that has been long established—indeed, the noble and learned Lord, Lord McCluskey. accepted that—and is fundamental to the policy of revenue collection that has been pursued by different governments over the past 100 years or more. Therefore it is something that is well known to all those who are creditors or potential creditors in the ordinary commercial case. So far as Scotland is concerned, the preferences for Crown debts became established during the 19th century and were brought together in the Preferential Payments in Bankruptcy Act 1888, just under 100 years ago. More recently they were brought together and restated in the predecessor to the present Bill, the Bankruptcy Act 1913, which gave the Crown preference for all assessed taxes, land tax, property tax or income tax . . . not exceeding in the whole 1 year's assessment". Since then the Crown preference has been extended by different governments to cover additional taxes and duties payable to the Crown as and when they were imposed. The noble and learned Lord opposite quoted value added tax. There is also capital gains tax, corporation tax, car tax and the like.

I have already made it clear that there are strong and, I suggest, indisputable reasons for retaining the preference for certain Crown debts. For the sake of clarity I deal separately with the taxes. First, there are the taxes which are collected for the Government by an agent, such as an employer. Here I am talking about PAYE, VAT and so on. Secondly, there are those other taxes and duties which are paid directly to the Government. The noble and learned Lord opposite has already referred to the arguments which I have placed before your Lordships for retaining the preference for the taxes collected by an agent. I suggest that, again, these are indisputable.

Indeed, the Review Committee on Insolvency Law and Practice, which was chaired by Sir Kenneth Cork, recommended the retention by the Crown of a limited preference for these taxes. After all, they represent monies which the debtor has deducted or collected acting as an agent for the Government but which have been diverted for his own purposes instead of being paid over to the Exchequer. Such arrears represent the employee's tax liability which the employer has deducted. Thus, it was never the employer's money. Inasmuch as the liability was never his own, it is substantially different from his own tax debts, or, indeed, his debts to other creditors. The preference afforded to the Exchequer is limited to one year, which is the shortest practical period which can be accommodated within the collection arrangements for these taxes.

I should perhaps say that the Institute of Chartered Accountants of Scotland was recently good enough to send me a copy of letters which it had sent to others of your Lordships, including the noble and learned Lord opposite. In that letter the institute made quite clear that it did not agree with the Scottish Law Commission in its view that all Government preference should be swept aside. Indeed, it goes on to say that in its view a clear case can be made for giving a certain amount of preference to debts like value added tax when the debtor is acting as a collecting agent. It is fair to say that it felt that the preference should not extend beyond sums which fall due outside six months before sequestration; but in a sense I answered that point when I said that the preference afforded to the Exchequer is limited to one year, which is the shortest practical period which can be accommodated within the collection arrangements for such taxes as those collected by an agent.

The particular justification for the retention of preference for other taxes and duties, which applies also to those taxes which are collected by an agent, is, as I made clear on Second Reading, the fact that the Crown is an involuntary creditor and as such is placed at a significant disadvantage in relation to other creditors. The essential point to stress is that taxes on business profits are already payable much later than normal commercial debts—other than of course cases where there may be a formal trade credit carrying a commercial rate of interest. Thus, the normal due date for Schedule D income tax and corporation tax averages between 15 and 27 months after the date when the relative profits were earned. In practice, settlement can often be much later than that. Of course, interest runs only from the normal due date, and the appeal process, which is provided for by statute, may delay payment for a further six months after that. That effectively means that, for example, interest may not be payable on unpaid tax until as much as 33 months after the period in which the profits were earned.

5.15 p.m.

Furthermore, the Crown is unable to pick and choose its debtors even where it knows that person has a previous record of indebtedness. In the normal commercial world it is customary, one would have thought, for those intending to enter into commercial engagements, if they so wish, to make inquiries about the credit worthiness of the person with whom they are to carry on business. If they so desire they are able to take such security as they may feel necessary in such a case. Above all, they are operating in a position where they know what is the existing law; namely, that if the person with whom they are contracting is bankrupted the Crown has certain preferences. Therefore, it is not a question quite as bleak and as open as the noble and learned Lord opposite suggested. The law is quite clear. In my submission the ordinary commercial creditor is, if he so desires, in a position to protect himself by taking such security as he thinks necessary in a case where he believes that the credit worthiness of the person with whom he is doing business is in doubt. One thing is quite clear it is not an option open to the Crown. The Crown takes every man as he is, warts and all.

Accordingly, as I say, the Crown is unable to pick and choose its debtors, even where it knows that the person has a previous record of indebtedness. Moreover, the Crown is not, like the ordinary creditor, able to protect itself in any circumstances; for instance, by taking security for its debt. Thus, if I might put it another way, in direct competition with an ordinary creditor the Crown is at a considerable disadvantage. It is precisely to redress the balance (although, I accept, only to a limited degree) that the system of Crown preference exists.

The noble and learned Lord, I think in quoting Gertrude Stein but using a slightly different word—"a rose is a rose is a rose", but for him a debt is a debt is a debt—has rather suggested that there is no good reason why the Crown should be treated differently from individual creditors. He also argued: why should individuals be made to suffer for the general good by allowing the Crown preference? But that is simply one way of looking at Crown preference. I suggest that the other side of the coin might pose the question: why should the general body of taxpayers pay higher taxes to meet an insolvent's trading deficit? It is undoubtedly the case that one man's tax arrears becomes everyone else's taxes. There is a balance to be achieved. On the one hand, there is the need to protect the interest of the general body of taxpayers; and, on the other, to preserve the rights of individual creditors.

I submit to the Committee that the one-year limited preference seems to be right, particularly considering that in many cases the tax at issue is PAYE, and that it is the proper compromise between an absolute preference for taxes, which would, of course, protect the general body of taxpayers at the expense of the individual creditor, and no preference at all, which would benefit the individual creditor to the detriment of the general body of taxpayers.

It might also be instructive if I were to draw the attention of the noble and learned Lord to some of the practical implications of a removal of Crown preference for taxes, which would of course protect the general body of taxpayers at the expense of the preference would without doubt lead to an increase in early pinding—that is to say, seizure of a debtor's assets.

At present, there are many businesses that get into temporary financial difficulties, but for whom there is every chance of recovery, given time to sort out their affairs. However, without the limited security that Crown preference currently affords the revenue departments, then they would undoubtedly need to enforce collection at a much earlier stage than they do currently. This would obviously be to the detriment of individual businesses, and indeed to the economy as a whole, as it would lead to bankruptcies in cases where, given a little time, they could have recovered. Accordingly, the existence of the Crown preferences is indeed a means whereby bankruptcies are avoided, and that also seems to be something which your Lordships should have firmly in the forefront of your minds in this matter.

For all these reasons, I say that Crown preferences, so far from being abolished, should be retained, and that there are good, sound, practical reasons for that being the case. I am also bound to say that I am unable to recommend to your Lordships that this amendment be accepted because it is also technically deficient in a number of respects. For all these reasons, I would oppose this amendment.

Lord Wilson of Langside

The two speeches on this matter certainly were interesting, but surely the outcome of this debate is very unsatisfactory. We heard from Lord McCluskey a classic presentation of the case for the complete abolition of Government preferences, and we heard the statutory reply. I do not regard myself as an authority in this field at all, but I was struck first of all by the fact that the Lord Advocate referred to the circumstance that the Institute of Chartered Accountants of Scotland have not agreed with the Scottish Law Commission's recommendation that all Government preferences should be swept aside. That of course is perfectly true, but the emphasis in the case of the Chartered Accountants of Scotland was on the word "all", and the same applies to the Lord Advocate's praying in aid of the Cork Report.

What I should have thought, trying simply to assess the weight which should be given to each of the arguments, was this. It is quite clear that the Crown preferences could not be abolished by this Bill, but it is equally clear that the matter needs further clarification with a view to amendment in due course. For one thing, it is quite clear that they could not be abolished in an Act applicable only to Scotland, and to that extent it is perhaps a waste of your Lordships' time to be talking about it at all. However, what disturbs me is the Government's apparent reluctance to grasp the nettle of the problem and to face up to it instead of just rejecting out of hand what the Scottish Law Commission propose.

Lord Polwarth

A mere layman hesitates to intervene after the contributions of three such skilled and powerful advocates from Scotland. My only claim is that many years ago I was obliged, in the course of preparing for my examinations as a chartered accountant, to try to learn something about the law of bankruptcy. Singularly little did I learn, and even less do I remember.

It is very difficult, obviously, to contravene the very powerful arguments of the noble and learned Lord who spoke for the Government; but I do find it slightly distressing that the Government have not thought fit to listen to the arguments of two such experienced and disinterested bodies as the Institute of Chartered Accountants in Scotland and the Scottish Law Commission. I cannot help feeling that at the bottom, behind all those powerful arguments, lies simply the rapacity of the Treasury. I ask the Government to give a little further thought, at least, to going the length of the recommendation of the Institute of Chartered Accountants while retaining the preference for the so-called agency debts.

Lord Ross of Marnock

I was taken by the statements of the Lord Advocate in respect of this. Here we have a Bill that is based entirely upon the Law Commission's report, and I have heard so much praise about the Law Commission's report in respect of bankruptcy. Without it we would not have had this Bill. In fact, most of the Bill was drawn up by them. There is one important point however with which the Government differ. Indeed, it is not just a question of differing. If it had just been that, being a reasonably-minded man I should probably have had the attitude towards the Government that you must consider what they are doing, and all the rest of it.

However, here we have this great commission, and up gets the Lord Advocate and says: "In this respect"—and I took his words down—"the arguments for what the Government are doing—leaving things alone—are strong and indisputable". What kind of language is that—"strong" and "indisputable"? They can be strong, yes, but I would not say they were indisputable when we have the Law Commission bringing forward this proposal that has been put forward today in this amendment—because it is not my noble friend's amendment: it goes back to what the Law Commission suggested.

I heard the Lord Advocate—and I have been listening for quite a time, sitting quietly here—speak about an amendment we had down which was intended to give a certain amount of discretion to a court. The argument of my noble friend at that time had been, "Well, if the debtor was given a little more time, it might well be that he could pull his business round". What was the argument of the Lord Advocate, who dismissed that? He gave no discretion to the court in that respect. He said: "Ah, but if you had Crown preference, the Crown would be free not to press the case for sequestration. The Crown could give them a certain amount of further time to try to pull things round". I think that that was the case that was made by the Lord Advocate.

I find there is a certain amount of arrogance in the Government's case, and it is that to which I object most of all. They seem to forget that we are listening to their arguments from one amendment to the other, and they do not add up. So I hope that the Lord Advocate will think again.

Lord McCluskey

I am indebted to others who have spoken in support of the amendment because it certainly shortens my task, but I do want to emphasise the point that my noble friend Lord Ross of Marnock has just made. It is a piece of nonsense to suggest that the argument is indisputable when the fact of the matter is that it is disputed by every body that has been consulted. Furthermore, every argument that the Lord Advocate has put forward is in fact taken out of the Scottish Law Commission report. It provides a nice book of reference for all the arguments in favour of retaining Crown preference and proceeds to demolish them with remorseless logic that obviously escaped the Lord Advocate and those behind him.

The Institute of Chartered Accountants of Scotland was quoted. I am very glad that the noble Lord, Lord Polwarth, was here to tell us the true situation. Of course it did not suggest that the Scottish Law Commission proposal should be taken the whole way and all Crown preference should be abolished. There are differential arguments, which I acknowledge. But to suggest that the arguments put forward are indisputable is, I am afraid, arrogant.

5.30 p.m.

So far as the technical deficiency of the amendment is concerned, as my noble friend Lord Ross said a moment ago, it contains the words in the Bill drafted by the Scottish Law Commission, so I do not apologise. In any event, it is not my job to draft specific amendments: it is my job to raise questions of principle.

The argument was repeated on this occasion about the money which is collected by the unwilling tax collector—namely, the employer—on behalf of the Inland Revenue or the Customs and Excise. It is argued that it was never the individual's own money and therefore the Government should have preference. Let us consider this case. I could go into a travel agency tomorrow and hand over £1.150, which is £1,000 for the service and £150 VAT. Three days later, before it has delivered to me the tickets for my holiday, the agency goes bust. If it is a private business, I then rank in its sequestration, but do I find that I get back £1,000? No, I do not, because it can pay only a small percentage. Does the revenue get the £150 that I handed over? Yes, it does. The argument is that that was somehow the Government's money. I have had no benefit from it and no service, but none the less the Government would recover it. That, again, is not a respectable argument.

The involuntary credit argument which is put forward again is demolished line by line and word by word at the top of page 218 of the report. The reasonable foresight argument is demolished about 15 lines down on page 218, in the paragraph there.

It is simply nonsense to talk about redressing the balance. If one is a big creditor or a bank it may be possible to insist upon getting certain forms of security when you lend or advance money, but a small trader cannot in practical terms do it. There may be a kind of balance between the Bank of Scotland or The Royal Bank of Scotland, or whatever it may be, on the one hand, and the Government, on the other, but in this great wrestling act between the two giants the small businessman and the small trader is crushed under foot. He never benefits, because there is simply no way in which he can establish a preference.

I do not propose to divide on this matter because the Committee is not well attended. I am glad that the arguments have been put forward fairly fully, and I hope that on a future occasion, whether here or in another place, the Government will be put to the test. For the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 48 agreed to.

Clauses 49 and 50 agreed to.

Clause 51 [Automatic discharge after 3 years]:

Lord McCluskey moved Amendment No. 19: Page 54, line 21, at beginning insert— ("( ) the debtor may, not earlier than one year after the date of sequestration, petition the sheriff for his discharge.")

The noble and learned Lord said: I hope that I can deal with Amendment No. 19 fairly shortly. Here, again, we are dealing with a situation in which the Government have chosen to depart from the recommendations of the Scottish Law Commission. What is recommended was that there might be an accelerated discharge of the bankrupt after a period of not less that 12 months, and that there should be automatic discharge after a five-year period.

First of all, before the Lord Advocate says it, I acknowledge that the amendment is technicaly totally deficient. That is because I did not have time to copy out the massive provisions contained in the Scottish Law Commission Bill. I intend to raise only the principle. I apologise profusely in advance for the amendment's being technically defective.

However, one can certainly see that there may be many circumstances in which the debtor is relatively innocent. I gave your Lordships the examples earlier, and I refer to them again briefly. If somebody in business finds that his product is temporarily put off the market—for example, like the Mars bar—or if he has been hit by an economic squall that is not of his own making, like the fall in the value of sterling against the currency in which he is dealing, he may, entirely without fault, be caused to be sequestrated, and there is nothing he can do about it. In those circumstances, one would have thought that the no-fault debtor ought to be able to have his sequestration recalled fairly soon, even though he cannot pay off his debts.

Accordingly, I have considerable sympathy for the Scottish Law Commission's approach. I think that the Government's approach certainly requires to be justified. This is an amendment that I think the Government should certainly consider, although it could not be moved into the Bill at this stage because of its defective characteristics. I beg to move.

Lord Cameron of Lochbroom

I recognise the purpose of this amendment. Perhaps I can make clear to the Committee the reason why there has been a change made from what was proposed by the Scottish Law Commission so far as automatic discharge of a debtor is concerned.

If I may deal first of all with the question of the period of the automatic discharge of the debtor, the Scottish Law Commission proposed a period of five years. It commented, however, that: there is no certain guide as to what the period should be". It opted for five years simply because that is the period of short negative prescription in Scots law. The White Paper, A Revised Framework for Insolvency Law, proposes a period of three years both for the automatic discharge of a bankrupt under English law and for the automatic disqualification of directors of insolvent companies. The view was taken that harmonisation with the proposals in the White Paper represented a more powerful reason for altering the period of automatic discharge to three years than for retaining the longer period of five years suggested by the Scottish Law Commission.

I turn now to the question of the accelerated discharge of the debtor. In the first place, the Law Society of Scotland and the Institute of Chartered Accountants of Scotland represented to me strongly that the minimum period of a year for accelerated discharge was too short. Sequestrations are rarely completed in that time, and a provision seemingly allowing a debtor to escape his responsibilities after so short a time, regardless of how such a provision would in reality be applied, would tend to devalue the sequestration procedure in the eyes of creditors: whereas, of course, the whole intention of the rest of the Bill is to achieve exactly the opposite.

The professional bodies to which I have referred considered that two years was the absolute minimum period that should apply. In view, however, of the reduction of the period for automatic discharge from five years to three, a provision for accelerated discharge, which could be used no earlier than one year before the debtor was automatically discharged under Clause 51 of the present Bill, seemed unnecessary and unwarranted. I should say that the professional bodies to which I have referred were content with that.

For those reasons, and entirely accepting of course as the noble and learned Lord opposite said, that his amendment was simply designed, as it were, to secure the explanation which I have now tendered, I hope that he will not further press his amendment. In my submission, there are good and sound reasons why there has been a departure from the suggestions made by the Scottish Law Commission in this regard.

Lord McCluskey

I am indebted to the noble and learned Lord the Lord Advocate for explaining the matter. I do not think that I require any further explanation from him. I think, however, that if he considers carefully the argument that I have presented and his reply he will find that in one respect it does not meet the argument. That one respect is this. Where you have a debtor who can demonstrate to the court that he is totally faultless, that he himself has been the victim of circumstances which are quite outside his control and are essentially macro-economic circumstances, or particular circumstances which have affected him in a way that shows that he has not mismanaged his business in any way, then it seems unfortunate that he cannot get his discharge. The obtaining by him of his discharge will not affect the administration, the winding-up of his estate; that can still go on. But I think his case might be special. I think that the Scottish Law Commission's provision in their Clause 51 provided for that possiblilty. It appears to me that it would be worthwhile the Government just thinking again about whether they might not create the exception for the exceptional case. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 20 and 21 not moved.]

Clause 51 agreed to.

Clauses 52 to 63 agreed to.

Clause 64 [General offences by debtor etc.]:

Lord McCluskey moved Amendment No. 22: Page 64, line 29. leave out ("5") and insert ("2").

The noble and learned Lord said: Amendment No. 22 is one of the sequence of amendments which deals with the question of penalties: leave out that part of Clause 64(10) where the penalty again is a five year penalty. I need not add very much to that except that I have already said earlier that in my advice to the Committee the imposition of the five year maximum is absurd. But if you look at the particular offence for which five years' imprisonment is deemed in some circumstances to be appropriate here, you will find it on page 63 of the Bill, subsection (7). I read one of the offences: A debtor who is engaged in trade or business shall be guilty of an offence if—…

1. (b) at any time within the 3 years immediately preceding the date of sequestration, he has failed to keep or preserve such records as are necessary to give a fair view of the state of his assets or his business … unless he shows that such failure was neither reckless nor dishonest."

So a businessman who for a period of three years before his sequestration is reckless enough not to keep his books properly can be sent to prison for five years. Again, it is singularly inappropriate in relation to that type of offence to have a sentence of five years' imprisonment possible on indictment in the High Court. In my submission this is yet another example of the lack of sound thinking in relation to the penalties provision of this Bill. I hope that the noble and learned Lord the Lord Advocate will consider that matter along with the other matters that he is going to consider. I beg to move.

Lord Cameron of Lochbroom

I think I have already indicated that I am prepared to look at all the questions of offences and penalties. Obviously I will take into account what has been said by the noble and learned Lord opposite so far as this matter is concerned also.

Lord McCluskey

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 65 [Summary proceedings]:

5.45 p.m.

Lord McCluskey had given notice of his intention to move Amendment No. 23: Leave out Clause 65 and insert—

• "Legal proceedings and penalties.

65.—(1) Summary proceedings for an offence under this Act may be commenced at any time within the period of 6 months after the date on which evidence sufficient in the opinion of the Lord Advocate to justify the proceedings comes to this knowledge. (2) Subsection (3) of section 331 of the Criminal Procedure (Scotland) Act 1975 (date of commencement of summary proceedings) shall have effect for the purposes of subsection (1) above as it has effect for the purposes of that section. (3) For the purposes of subsection (1) above, a certificate of the Lord Advocate as to the date on which the evidence in question came to his knowledge is conclusive evidence of the date on which it did so. (4) A person guilty of an offence under this Act shall be liable—

1. (a) on summary conviction—
1. (i) subject to sub-paragraph (ii) below, to imprisonment for a term not exceeding 3 months;
2. (ii) if he has previously been convicted of an offence inferring dishonest appropriation of property or an attempt thereat, to imprisonment for a term not exceeding 6 months;
2. (b) on conviction on indictment in the sheriff court, to imprisonment for a term not exceeding 2 years.").

The noble and learned Lord said: The members of the Committee who are familiar with the Scottish Law Commission report will recognise that my new Clause 65 is a revised version of the Scottish Law Commission's version of Clause 65. The difference of course is that I take out all reference to conviction on indictment in any court other than the sheriff court. That is once again to formulate the point that if you have to indict in respect of an offence then you can indict in the sheriff court.

In the circumstances and having listened to what the noble and learned Lord the Lord Advocate has said, I need not press this matter. Unless he wishes to say anything in relation to this matter in particular, I propose not to move this amendment.

The Deputy Chairman of Committees (Lord Alport):

In those circumstances, perhaps I could put right a matter of order about which I made a mistake earlier. That was that I did not move that Clause 64 stand part of the Bill.

Clause 64 agreed to.

The Deputy Chairman of Committees

Clause 65, Amendment No. 23 not moved?

Lord Cameron of Lochbroom

Perhaps I should simply say that obviously I have listened to what the noble and learned Lord opposite has said. I should just make this comment so that it is set out clearly: that the effect of limiting the jurisdiction for indictment to a sheriff court would inevitably bring the matter of imprisonment down to a term not exceeding two years. I wish to make it quite clear, as I did at Second Reading, that there may well be certain offences which would justify a term of imprisonment exceeding that but this will have to be looked at in the general question of harmonisation of the law affecting insolvency, both north and south of the border.

[Amendment No. 23 not moved.]

Clause 65 agreed to.

Remaining clauses and schedules agreed to.

House resumed: Bill reported without amendment: Report received.